Research Speak Week Ended – 25th June, 2010

Market Commentary
Indian market has bounced back smartly since recent correction. This rebound is remarkable in the context of
positive data pertaining to improvement in credit off take to private companies, significant improvement in IIP
numbers and policy initiatives like 3G auction , broadband wireless auction and partial deregulation of fuel prices.
In contrast to Indian capital markets bounce back in the backdrop of several positive news, international capital
markets have bounced back simply on the basis of absence of more bad news from Euro zone. Most of the Indian
companies catering to domestic consumption and investment cycles have recently announced about strong
revival of demand. Thus there is strong difference between Indian capital markets recovery and elsewhere.
Recently global markets took a very positive view about China’s announcement to allow gradual appreciation of
its currency. This only reinforces the view that global markets are really struggling to get any meaningful positive
news and hence such huge kneejerk reaction to China’s announcement.

But look at India where month on month automobile sales are picking up despite huge base effect, real estate
players are announcing about demand revival, many such stalled projects have been resumed in recent times,
FMCG companies are upbeat about strong sales trend in urban and rural areas, government confident of
consumers absorbing hike in petrol and diesel prices, much better monsoon compared to last year etc. All these
factors point to strong earnings growth in most of the domestically focused companies.

The only joker in the whole pack may be inflation numbers and hence fear about interest rate hike. But there is
strong indication that inflation numbers are gradually being contributed not only supply side pressures but also
demand side factors. Hence rise in inflation is only on expected lines. Contrast this with most of other economies
suffering from deflation fear and hence there is hardly any discussion of interest rate hike saves for China.

Low interest rates globally may be beneficial for Indian capital market and Indian companies eager to raise capital
abroad. Moreover recent major policy moves by Central government may enhance the multiples traditionally
enjoyed by India so far in the eyes of FII investors. Hence unless and until some catastrophic event happening
abroad and consequent rise in risk aversion, Indian capital markets are likely to witness new highs in coming days.
But in this benign situation, stock picking skills will be rewarded more than blind investment style.

Banking

RBI Action
There are various speculations and expectations surrounding what step the RBI would take in its next
meet on July 27th, or even before that since the inflation is soaring high in double digits. (see fig.
below)

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 265 12%
260
10%
255
250 8%
245

Inflation
240 6%
WPI

235 4%
230
225 2%
220
0%
215
210 -2%
May-08
Jul-08
Sep-08
Nov-08

Jan-09
Mar -09
May-09
Jul-09

Sep-09
Nov-09
Jan-10
Mar -10

May-10
WPI Inflation

The wholesale price index (WPI) has been constantly going up from Jan 09 onwards when the inflation was at
negative level (due to high base effect). However, the current high level of inflation is also helped by lower base.
But the price increase in agri and other related product is real. With fuel price hike, the inflation figure will soar
even further. However, raising interest rates will make no significant changes to economy or the banking system
as short term call market rates are at around 5.5%, higher than the repo rate, which is currently not the
operational rate. Moreover the system which for over a year has been flushed with liquidity and has been parking
significant money at the reverse repo window has been net borrower at the window up to the extent of around
Rs. 80,000 crs. This simply speaks that the system is short of cash, primarily due to auction of 3G spectrums and
payment of advance tax. The amount collected will take around a month to get channelized back into the system.
Hence, short term rates will remain on the higher side and the effect will be clearly visible on the stock prices of
banks and rate sensitives. However, this short term spike in rates will have muted affect on banking space
especially on the PSU banking universe we track as they were sitting on low duration bond portfolio, and very
little proportion subject to Mark To Market (MTM). However the boost in advances will be more beneficial to the
NIM and ROE figures. The recent correction in banks should be used to buy into. We remain bullish on Federal
bank and Bank of Baroda, more so after the recent correction. We are also positive on HDFC Ltd which will
benefit significantly due to its life and non-life insurance business which will get better valuation in the light of
changed valuation method prescribed by RBI, where the further investment by foreign partners would be done
based on future cash flow and not at book value adjusted for expected return.

Stock and Sector Update

From adhoc populism to first bold step to petroleum pricing deregulation

India imports around 80% of its total crude oil requirement. Though India is comparatively well endowed with
hydrocarbon reserves namely crude and natural gas, only 29-30% of India’s total prospective areas have been

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well explored. Though successive round of NELP (new exploration licensing policy) is almost 10 years old, not
much crude or gas has been added except cairn India’s Rajasthan block. RIL’s D6 block has been unable to ramp
up gas production beyond 60mmscmd despite its daily production capacity of 120mmscmd due to some policy
matters.

In light of these facts, it was imperative that India’s consumers should reflect realities to the maximum possible
extent so that this non renewable scarce fuel is used judiciously. But government in its wisdom decided to shield
consumers from reality by directly or indirectly providing subsidy.

Current Pricing Policy: A key reason behind high petroleum subsidies has been pricing policy, whereby the prices
of petrol, diesel, liquefied petroleum gas (LPG) and kerosene, which comprise 63% of the total consumption of
petro products, are controlled by the Government. Under this system, oil marketing companies have been
making losses with the burden being borne by: (1) upstream oil sector companies, (2) the government – by
issuing oil bonds, and 3) the residual amount absorbed by downstream OMCs. Apart from imposing a huge fiscal
strain, the policy regime has discouraged competition, since private sector players do not receive financial
support. Had there been no hike in petrol or diesel prices, the total under recoveries for FY11E would have been
Rs1 lakh crore. In light of this dire situation, planning commission member Mr. Kirit Parikh was appointed to
suggest some reforms so as to reduce huge fiscal deficit problem and also to improve financial health position of
upstream companies like ONGC and Oil India Ltd and downstream companies like IOC, HPCL and BPCL.

Reforms proposed by the Kirit Parikh Committee include:

? Petrol and Diesel: Complete de-regulation of petrol and diesel pricing, with prices being market-
determined at both the refinery gate and the retail level. It also recommends an additional excise duty on
diesel car owners.
? LPG and Kerosene: The Committee recognizes that these fuels be subsidized, since kerosene is a primary
source of lighting in most rural households, while LPG is a clean-cooking fuel, and therefore a merit good.

However, it has pointed out that there is scope to rationalize allocation, given that the poorest rural households
spend only 2% of their monthly expenditure on kerosene and much of it is currently being adulterated with diesel
and/or smuggled to the neighboring economies where the price is 3 to 4 times that of India. To this end, it
recommends:
*An increase in kerosene prices by Rs6/ltr (current price at Rs9/ltr), and thereafter periodic increase in prices in-
line with nominal agri GDP growth.
* An increase in LPG prices by Rs100/cylinder (this would keep subsidy provided at FY04 levels), and thereafter a
periodic increase in prices inline with per capita income.

Yesterday the much-awaited Empowered Group of Ministers (EGoM) meeting resulted in a number of sweeping
changes on fuel prices; including: (1) shift to market-driven prices for petrol – this would result in prices rising by
6.7% (an increase of Rs3.5/ltr),(2) while diesel would also be de-regulated over time, prices have been raised by
5% (Rs2/ltr) for now, (3) Prices of cooking fuels – LPG and kerosene – have been raised by 11.2% (Rs35/cylinder)
and 33.3% (Rs3/ltr) respectively; but continue to remain administered. Changes signal a move towards
recommendations of the Kirit Parikh Committee and bode well for the fiscal health of the economy.

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What the EGoM meeting is silent about

Amidst the euphoria created by yesterday’s decision to link petrol prices to market linked prices of crude, some
gray areas still remain. First and foremost, petrol under recoveries constitute less than 10% of overall subsidies or
under-recoveries. Hence deregulation of diesel would have been much more welcome. Secondly, government
may interfere at this free pricing of petrol if crude oil prices go up substantially. Though it has not exactly spelt
out at what level of crude price, government intervention will become necessary; it still remains a grey area.

Thirdly, at what ratio the remaining under recoveries will be shared among upstream, downstream oil companies
and government has not been spelt out. When the actual under recovery figure is announced next year, then
only we will come to know the sharing burden among all these companies.

Fourth, Kirit Parikh committee has recommended that GAIL be left out from any subsidy sharing mechanism as it
is neither strictly upstream nor downstream company. But government has not taken any decision as far as GAIL
is concerned. Thus as on today we do not know whether GAIL would share any subsidy burden in FY11E and
beyond.

Stock impact

All public sector oil companies whether upstream and downstream companies are likely to be benefitted from
the above move by the government. Our recent top pick has been ONGC as recently gas price being sold by it was
raised significantly. We have put a price target of Rs1450 before yesterday’s move on ONGC with 12 month
investment horizon. The stock has gone up significantly after that. Yesterday’s move has resulted about 15%
earnings upgrade to ONGC. Additionally, two rounds of successive positive reforms has the potential to raise the
P/E multiple enjoyed by the company so far. Traditionally ONGC has enjoyed around 11-12 times forward one
year P/E multiple. At around Rs110 EPS for FY11E and applying a P/E of 14, we arrive a target price of Rs1540
for ONGC. Retain “BUY”.

On the other hand, EPS upgrdation of about 20% is likely for all the PSU oil marketing companies. Despite
yesterday’s smart move by IOC, BPCL and HPCL, we see around 10-15% upside in all these three companies. We
recommend “Buy” in all of them.

Yesterday’s decision may result in some upside in private refiners like RIL and Essar Oil as they may reopen their
petrol outlets. Moreover they are capable of refining petrol and diesel at much lesser cost compared to PSU
refiners. Hence recommend “BUY” in these two stocks as well.

Infrastructure

20 km a day target a distant dream for the road ministry

Ever since Mr. Kamal Nath has taken over the road ministry, he has projected a dream target of building 20km of
road per day. Land acquisition problems and other execution hurdles have slowed down the process. Although

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government seems to have made a significant progress in addressing the issues, infrastructure finance is the
biggest concern for both the government and the private players.

Planning Commission deputy chairman Montek Singh Ahluwalia has also raised doubts over the feasibility of the
financing plan that targets 20-km-a-day highway construction. In his views the NHAI “does not borrow on its
strength and has a limited capacity available under government guarantee, which also has to meet the
requirements of other critical sectors.” In the EGoM meeting held in May, he said that the resource availability
for the National Highways Development Programme would depend on the needs of other sectors, which will
emerge after the finalization of the XIIth Five-year plan.

“There are various reasons that have forced the government to go on a back foot on the original financing plan.
Firstly, the NHAI was not able to award the targeted 12,000 km highway projects for 2009-2010 and managed to
award just about 3,700 km projects. This has created a backlog. Meanwhile, construction cost has gone up by 10
per cent, affecting the financing plan. The other major reason is that cess collections have also been down by 3-4
per cent in 2009-10,” a senior government official associated with the process said.

Our View

We need to understand the fact that though the target of 20km a day is being questioned, there is going to be
tremendous improvement incrementally. Currently India is building roads at the rate of 5-6 Km a day. So even if
India can manage to reach the levels of 9-10 Km a day, it would mean a lot of progress from the current levels.
Rather than looking at the target being missed, we should observe the continuous progress in the sector.
Individual companies which have strong financial and technical capabilities will continue to do well.

Nagarjuna Construction Company (NCC) Ltd

We have included NCC in our coverage. The company has posted a strong result for FY10. It has achieved a
turnover of Rs 5897 Cr for the current year compared to Rs 4786 Cr in the previous year, registering a growth of
23%. The company has posted an EBITDA of Rs. 658.23 Cr (11.11%) and a net profit of Rs 282.74 Cr as against Rs.
504 Cr and Rs 181 Cr respectively in the previous year. The company has reported a consolidated EPS of Rs 11.55
as against Rs 7.92 in the previous year.

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Diversified Order book: Order flow is expected to continue in FY11 as well.

Order Book Order Mix (In Cr) Order Mix (%)

Summary
Sectors 2009 2010 2009 2010
Building 2561 3689 21% 24%
Transportation 976 1178 8% 8%
Water & 2439 2421 20% 16%
Environment
Electrical 610 710 5% 5%
Irrigation 610 1576 5% 10%
Metals 732 495 6% 3%
Power 732 1063 6% 7%
International 2561 3292 21% 21%
Others 976 946 8% 6%
Total 12197 15370 100% 100%

The management expects a consolidated sales turnover of Rs 7300 Cr for the current fiscal ending March 2011
with NCC standalone contributing about Rs 5800 Cr, International Construction operations about Rs 1150 Cr, NCC
Urban about Rs 250 Cr and NCC Infra about Rs 110 Cr.

EBITDA margin of 10.1% -10.5% in FY11 is expected.

Order intake for the current fiscal is expected at about Rs 15000 Cr. The company expects strong traction in
verticals like building, roads, power and water. The company expects fresh orders to the tune of Rs 3500 Cr from
building, Rs 2000 Cr worth of orders in roads, Rs 5000 Cr in power, Rs 1500 Cr worth of orders in water and about
Rs 500-700 worth of orders from other verticals. As of now the company is L1 for orders worth Rs 3000-4000 Cr.
And has about Rs 5000-7000 Cr worth of orders for which it has submitted bids or various stage of tendering etc.

Consolidated debt is about Rs 3232 Cr with standalone debt standing at Rs 1580 Cr.

Power projects: About 65% of the work has been completed so far on the 110 MW Sorang Hydro Power Project
in Himachal Pradesh. The CoD (date of commissioning) is Sep 2011. Regarding the other 280 MW hydel power
project, it is in development stage. As far as the AP thermal power project all approvals were in place and the
work to commence in a couple of months.

BOT Road projects: The Company’s BOT road portfolio consists of 5 road projects of which 3 being toll based and
2 being annuity based. Of the total 5 project, two is already operational and the balance three will commence
operation in second half of FY11 generating revenue.

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International Operations: Total revenue from international operation during FY10 stood at Rs 1128 Cr. The Oman
subsidiary made a turnover of Rs 80 Cr with an EBITDA of 17% for FY10 and the Dubai Subsidiary earned an
income of Rs 176 Cr with an EBITDA of 7.29%.

Recommendation

The stock of NCC is currently trading at Rs188. It is 16 times FY10 earnings. The strong order book of Rs 15370 Cr
is 3.2 times the construction revenues of FY10. With the diversity in order book and a constant push from the
government for the infra sector, we expect the company to execute its projects in time. The improved execution
cycle should reflect in strong FY11 earnings as well. Thereby, we are bullish on the stock at current levels.

M&M
Buy at dips

Current CMP: Rs 615 Recommended entry price: Rs 540 Target price: Rs 630.

FY10 was a year of strong growth for the company due to robust demand for its utility vehicles and tractors. All
its models in utility vehicles –Scorpio, Xylo and Bolero were in good demand resulting in robust volume growth in
this business segment. Despite poor monsoons in FY10, tractor sales were quite good due to the government’s
focus on agriculture, rural and infrastructure development. Higher volumes coupled with lower commodity costs
resulted in significant margin expansions in both the businesses-automotive(12.61% vs 6.06%) and farm
equipment (18.91% vs 11.01%).

Volumes FY09 FY10 % chg.

UVs 153655 214128 39%
Tractors 112695 165633 47%

Financial Performance
Particulars Q4FY10 Q4FY09 % chg FY10 FY09 % chg
Net Sales 5278.86 3619.38 45.8 18452.02 12985.25 42.1
PBIDT 863.7 619.14 39.5 3245.34 1403.97 131.2
PAT 570.26 418.07 36.4 2087.75 867.51 140.7

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Revenues Q4FY10 Q4FY09 % chg FY10 FY09 % chg
Automotive segment 3113.93 2189.6 42.21% 10615.19 7384.52 43.75%
Farm equipment segment 2176.34 1440.57 51.07% 7935.14 5667.23 40.02%

PBIT
Automotive segment 406.46 175.31 131.85% 1338.82 447.61 199.10%
Farm equipment segment 435.82 156.99 177.61% 1500.86 623.95 140.54%

PBIT margin (%)

Automotive segment 13.05% 8.01% 12.61% 6.06%
Farm equipment segment 20.03% 10.90% 18.91% 11.01%

We expect demand momentum in the UV segment to continue in FY11 with improving finance availability and
pick up in consumer spending due to higher economic growth. Tractors business is likely to see higher demand
with good monsoons this year coupled with increased emphasis of the government on infrastructure and rural
development. The company has entered the commercial vehicle business in a JV with Renault and has recently
commenced marketing the CVs with rollout of a 25 tonne truck. Good response to its CV products could be an
added positive in FY11. However its plans to enter the US market with Scorpio pickups has been delayed and the
launch is expected to be the end of the current year. The stock has given stellar performance in recent times and
any market correction could provide an good entry point. We recommend investors to buy the stock at dips at
around Rs 540/ level which would be 12(x)FY11E estimated standalone earnings with a target of Rs 630, an
upside of 16%.

Commodities Outlook

Steel

Global steel prices continued to be weak, and yet failed to find buyers in a pessimistic market. Buyers chose to wait and
watch in the anticipation that prices may fall further. This has further dampened the buying sentiments and most of the
purchases were based on immediate needs. Apart from the lack of buying interest, the large inventory levels have been a
burden for the producers in an already subdued market.

The producers are struggling with high inventory levels. Meanwhile, the declining prices coupled with weak demand have
created a tremendous pressure on the margins of steel makers. In case the downward price trend continues, there would be
production cuts as certain producers are facing margin pressure. Already certain areas are witnessing some overcapacity
situation. Thus, the buyers are lowering their offers to speed up sales.

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Some traders are optimistic that buying activity will revive in August-September when existing stockpiles will have been
depleted and demand from auto and white goods sectors will increase. However, owing to the current uncertainty the
market direction is difficult to predict.

Flat Products

There was an overall weakness in the flat products market this week. Irrespective of the region, the buyers deferred their
purchases anticipating a further fall in prices, while some of the players are lowering their offers to provide a boost to sales.
The export market was also quiet due to lack of buying interest in the market. The flat market remained weak in the
Southeast Asian region in tandem with sluggish demand and bearish sentiment. Regional buyers fear further price falls and
only CRC users who need material urgently were making their purchases. The sma ller mills were only able to sell at lower
prices because they are using lower-priced hot band. Spot HRC prices have also fallen significantly in recent weeks.

The downtrend continued in the Indian flat product market as the prices remained under pressure owing to low demand.
The market sentiment remained bearish, said a local trader. The buyers were cautious and expecting prices to fall even
further. On the other hand, Indian exports of primarily hot-dip galvanised sheets were under pressure from weak
international demand and aggressive competition from China. Amid a dearth of orders, several Indian mills were
surrendering to buyer demands for lower prices. Some are even trimming production by as much as 30%. However, on the
back of lack of buying interes t and large inventory levels burdening an already subdued domestic market, imports of hot
rolled coils into India have slowed.

Stock levels of commercial grade HRC have reached about 5,00,000 tons in Mumbai alone. The market expects the
inventories in thi s region to swell by a further 100,000-200,000 tons this month. Some traders are optimistic that buying
activity will revive in August-September when existing stockpiles will have been depleted and demand from India’s auto and
white goods sectors will increase. However, owing to the current uncertainty, the market direction is difficult to predict.

The situation in China witnessed no change as due to a lack of demand from overseas, most Chinese hot rolled coil producers
saw a shrink in their export orders. Chinese HRC exports, as per the market reports is expected to decrease in June by
around 30-40% from May, and therefore the domestic market will be under even more pressure. Already the China’s
domestic market is weak and adding on to the woes the foreign buyers are also not interested in buying.
Expectation

The market is unlikely to see a major difference from the current situation as the demand is likely to remain weak coupled
with fluctuating currency market and approaching European summer and Muslim festival Ramadan. In US, the demand is
expected to fall further. Meanwhile, in Europe, it is likely that the market will develop in one of two ways. If the euro
continues to strengthen, domestic buyers could turn to imports which might provoke a downward adjustment from
domestic mills. The alternative outcome is that buyers’ stock levels become depleted after months of no purchasing activity,
which would result in a sudden rush of re-stocking as long as imports do not play a role. But in both scenarios is likely to
occur in August. The Asian market is also unlikely to see any improvement before August as the buyers’ purchases would be
primarily need based.

Long Products

The long products market continued to be weak owing to sluggish demand and softness in scrap prices. The buyers are
anticipating a further drop in prices, which kept them away from making large purchases, and thus this week was mostly to
fulfil immediate requirements. In addition to this, the construction activities in most regions were slow, adding to the woes
of the producers. The market expects a number of production cuts across the globe to control the current downtrend.

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The long products market in Southeast Asia was very weak, along with the soft scrap market and bearish sentiment. Mini
mills of certain regions were mulling production cutbacks. The mills were incurring large losses because they are using scrap
booked previously at above $400 per ton cfr. In India, even as steel prices have declined across all regions in June, it has
failed to enthuse the buyers. Most steel majors have cut prices of TMT bars by around 6 percent in June to restore the
normal gap between their prices and the re rollers. However, market sources revealed that the cut was primarily to maintain
the project buying at the normal level which had shown signs of slipping.

In addition, higher import in May has been putting pressure on domestic steel makers. There is a growing fear that
continuation of this scenario might result into doubling of unsold inventories for certain steel makers, primarily the
secondary ones. “The inventory level moved up with both producers and traders, and this further dampened the
sentiments,” noted a trader. Market sources also confirmed that the market was weak owing to insignificant dema nd and
pessimistic sentiments. Although a section of the market feels that the buyers have adopted a wait and watch attitude,
others believe that there is actual lack of demand. The producers are struggling with high inventory level. “The producers
have huge stock with them as both the end users and traders have stopped purchases,” noted a local producer. Meanwhile,
the declining prices have created a tremendous pressure on the margins of steel makers, primarily the smaller players and
re-rollers. Already s ome of the secondary producers have cut production. In case the downward price trend continues, there
will be more production cuts as smaller producers are facing margin pressure.

In eastern India, the primary reason for the downtrend was the truncated iron ore movement from Jharkhand and Orissa,
according to local market sources. In addition, weakness in demand from the end user segment added to the woes of the
market. Meanwhile, as the issue of iron ore has been resolved at the official level, as per market sources, the situation might
ease soon. Thus, the local producers are expecting an improvement in the demand, primarily of ingots. The secondary
market has been almost non-functional for the past few weeks, and whatever movement of material took place, was
primarily in the prime products segment.

With the onset of monsoon, construction activities will decline, and thus there will be absolutely no support from this
segment in terms of demand. “There is almost no demand from the end users. Moreover, with the onset of monsoon,
construction activities have also slowed down. Thus, the demand for TMT bars is almost negligible,” noted a trader. The
prices have dropped significantly compared to previous month and followed a range bound movement during the initial
fortnight of the month. The market expects the trend to continue until the monsoons are over. And finally, the weakness in
the global steel market has also resulted in creation of major pessimism in the market, which is hampering the exports of the
secondary producers. The market is thus unlikely to see any improvement soon.

The situation was no different in China as prices continued to soften on the back of weak demand. Amidst this gloominess,
Shagang cut its rebar prices by RMB 100 per ton ($15 per ton) for mid-June delivery, but kept its wire rod prices unchanged.
Therefore, its 16-25mm HRB335 rebar prices declined to RMB 3,950 per ton ($578 per ton) and 6.5mm Q235 wire rod
remained at RMB 4,300 per ton ($629 per ton) inclusive of 17% VAT. Shagang will conduct maintenance on one of its bar
mills around June 15, which will cut production of rebar and barin-coil by about 60,000 tons. Some believe that Shagang’s
maintenance at this specific time is related to China’s current weak domestic market. China’s rebar markets have also shown
no signs of recovery after businesses reopened following the Dragon Boat Festival holidays over June 14 to June 16. Prices in
most cities are stable. Spot markets remained quiet although prices on the Shanghai Futures Exchange increased slightly,
supported by the strong performance of US stock markets. Buyers adopted a wait-and-watch attitude since market
sentiment has remained poor.

Expectation

The market is likely to remain weak in the week beginning June 21, 2010 on the back of poor demand and softness in the
scrap prices. The buyers would continue to defer their purchase as they anticipate the prices would fall further. In India, the
prices might see a range bound movement but if the prices continue to fall further, it may lead to a number of production

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cuts, mainly in the secondary market. In Turkey, some demand might come back to the market due to long-delayed
bookings, but not in the short term. At the same time the raw material side is not seen to be strong. Turkish market prices
are likely to fall further, if the fall in scrap prices continue.

Iron ore

Spot prices of iron ore in the Chinese market remained mostly unchanged despite reports of Baosteel agreeing to buy at
higher prices in the July to September quarter. China’s largest steelmaker, Baosteel, has apparently settled quarterly
contract prices with leading miners such as Rio Tinto and BHP Billiton at $147 per ton fob, for iron ore characterized by 62
percent Fe content, as per market reports.

However, contrary to supplier expectations, this news did not really help in lifting the sentiment in the market. Some market
participants attributed this dull scenario to the fact that the Chinese market had reopened after a three-day Dragon Boat
festival holiday on July 17, and since only one day was left before the weekend not many mills were keen on conducting
business. Now that Baosteel has agreed, it is expected that most other steel mills in China would follow suit and would
eventually have to agree with the hike. Baosteel, apart from being the largest steelmaker in the country, is also China’s
appointed negotiator in iron ore price talks with global miners. However, so far there has been no official confirmation or
public notice which has come in from either parties on the price hike which has been agreed upon.

There has been a marginal improvement in reference prices after the holiday break observed in some of the Asian countries.
Though the market continues to remain quiet reference prices for both 62% as well as 58% Fe content ore rose slightly in the
week gone by. The reference price for 62% Fe content iron ore fines was recorded at $144.10 per dry metric ton, cfr Tianjin
port, China, by the end of last week, registering a $1 per dry metric ton rise as compared to the previousweek’s reference
price.
Expectation

It seems that the much sought after stability in the iron ore market has finally set in. After the phenomenal rise in April prices
started dipping in May and have finally stabilised in the month of June. With contract prices getting fixed at rates which are
much higher than the current spot prices, suppliers will make all efforts to lift the spot market. Even though Chinese buyers
had indicated that despite the spot prices being low, the mills would honour the contract and stick to them, a major
discrepancy between spot and contract prices will not be sustainable. Hence, the spot prices are expected to pick up soon.

Our View

We remain cautiously optimestic on the indian steel sector and the iron ore space. Though the international scenario does
not look favourable at least from the demand side in the near term the domestic demand scenario does look robust. The
production cut backs and abolishion on the export rebate by China may keep the international steel prices to fall very
sharply from the current level, whether the import parity prices or the landed cost of steel remains in line with the
domestic prices or not is something we need to watch out for. For the time being we remain cautiosly optimestic on JSW
Steel and would urge investors to stay invested in the stock, however we maintain our ‘Avoid’ stance on Sesa Goa. If the
prices corrects another 35-40% from the current level it might become a good stock to accumulate.

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Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering samudrajit@eurekasecurities.com +91- 9748860335
Kinshuk Acharya Steel, Agriculture kinshuk@eurekasecurities.com +91- 9681478735
Md. Riazuddin, FRM Banking, Economy, Power riazuddin@eurekasecurities.com +91- 9903062346
Rajiv Agarwal Auto, Tea, Sugar rajiv.ag@eurekasecurities.com +91- 9903076345
Ankit Kanodia Infrastructure ankit_kanodia@eurekasecurities.com +91- 9163278562

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8 N S Road, 3rd Floor. 213 Nariman Point.
Kolkata - 700001 Mumbai-400021
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e-mail: helpdesk@eurekasecurities.com e-mail: mumbai@eurekasecurities.com

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